Military leaders, who last year orchestrated a coup to grab political power in Thailand, have recently visited a fortune-teller seeking political guidance. The visit came as no surprise to most superstitious Thais. Indeed, they say, the generals need all the help they can get as Thailand’s economy, south-east Asia’s second biggest, slows, and drags down with it the fragile popularity of the military government.
Since the September 19 coup, Thailand’s GDP forecasts have been lowered from 5% to 4-4.5%, and economists expect those forecasts will be cut again this year. In contrast, most of Thailand’s neighbouring nations will report economic growth between 5% and 8%.
The bloodless coup came after almost a year of political turmoil and ousted the then popular, but controversial billionaire prime minister Thaksin Shinawatra. Thaksin had been accused of corruption and abuse of power, especially after his family sold, tax free, their controlling stake in the country’s biggest telecoms and media company Shin Corp. The $3.8 billion deal triggered rolling street protests where thousands of Thais clashed in support for, and against, Thaksin. There had been hope that the coup would restore political calm to Thailand, and it did – briefly.
But the honeymoon is now over for the military. Consumer confidence has plunged to a five-year low, reflecting the real concerns Thais have about the slowing economy and the military-installed government’s ineptitude in delivering a solid plan to revive not only economic growth, but also democracy. Thai businesses are less pessimistic, with sentiment at only a seven-month low.
Blame game
“I blame the inability of this prime minister to set a limited, doable, workable agenda and some clear policy direction,” says Thitinan Pongsudhirak, director of the Institute of Security and International Studies, at Bangkok’s Chulalongkorn University. “Instead, the policy-making machinery and the policies have been murky.”
Chris Wong, who helps manage $25 billion at Aberdeen Asset Management in Singapore, agrees. “What the country really needs is consistency in terms of policy, and of implementation of policy.” He says Thailand’s current government should move quickly to restore democracy to avoid further political conflict. “The faster they have proper elections the better it is to erase all the concerns of the general public. There seems to be a continuous flow of negative news since the military government took over.”
Mass protests have begun in Thailand’s capital Bangkok, and this time the protestors’ chants and placards are anti-coup, and anti-military rather than anti-Thaksin. Supavud Saicheua, an economist at Bangkok’s Phatra Securities, expects that “political tensions will rise significantly” as the economic slowdown “shows no signs of relenting”.
Promises, promises
When Surayud Chulanont, a retired army general, assumed the role of prime minister of the military-installed government last October, he promised Thais that his year in office would be one of reform, but he has failed to deliver. He has failed to keep in line many of his ministers who espouse conflicting views on policies, generating widespread confusion and evidence that the cabinet is not working as a team. More importantly, however, have been the cabinet’s incoherent and ad hoc policies, which have eroded the confidence of many Thais and foreign investors in Thailand’s $195 billion economy.
The most controversial of such policies was last December’s introduction of capital controls, which were designed to halt speculation in Thailand’s currency, the baht, and protect exporters. Thailand’s economy for the past few years has been propped up by robust exports, which account for 70% of GDP. But the baht’s rise is expected to start crimping exporters’ earnings, even though exports grew a solid 18% in March. Last year, the baht appreciated 16%. The capital controls required equity, bond and mutual fund investors to put 30% of their funds in a Thai bank account, subject to penalties if they withdrew cash within a year. Foreign and Thai investors were shocked, as there had been no consultation about such plans. They panicked, and Thailand’s stockmarket plunged 15% in one day. “It was not a well-considered policy, particularly when foreign investors’ desire is to have free markets,” says Wong.
Thailand’s central bank was forced overnight to partially reverse the capital controls by waiving the 30% requirement for equity investors, while bond and property investors were exempted on March 1. Thailand’s benchmark SET index has recovered from its 15% one-day decline, but even so its performance has been lacklustre in the first quarter of this year, up less than 2%. During that period, Thai institutional and retail investors dumped 41 billion baht ($1.27 billion) in stock, which has been snapped up by foreign buyers, who are chasing high-yielding Thai stocks, trading at a discount to regional peers. Wong, however, says overall “most international investors have actually written off the market.”
Tall order
The bungled capital controls were one of the reasons finance minister Pridiyathorn Devakula, a former central bank governor, quit the Surayud cabinet in February after only five months in the job. The Bank of Thailand is supposed to set policy independent of the government. However, when the capital controls were put in place, Pridiyathorn claimed he had helped avert an export “crisis”. Pridiyathorn was replaced by Chalongphob Sussangkarn, a former World Bank economist, who now has the tall order of restoring confidence. Thitinan says the finance minister must shore up the country’s declining growth prospects, otherwise lower growth will undermine his position and erode the military government’s legitimacy even further. Thitinan is also unhappy with the performance of Bank of Thailand governor Tarisa Watanagase. She has continued to defend the imposition of capital controls as necessary to stabilize the baht.
In an interview with Emerging Markets, Tarisa admits that the capital controls did not stop the appreciation of the baht. It has gained a further 9% this year in offshore trading. But she said, it was the speed of the baht’s appreciation rather than the target level for the currency that had been the central bank’s primary concern.
“The rate of appreciation of the Thai baht is now lower. The point is, now we’re moving more or less in line with the rest of the region, which is the way it should be. If you look at these numbers, you can say the URR [unremunerated reserve requirement] has been successful in stabilizing the baht, not in keeping the baht at a constant level, because we’re not pegging it at any level.”
Her arguments don’t wash with Thitinan. “Tarisa Watanagase is now marginalized and compromised under a barrage of criticism in view of the central bank’s ineffective and controversial capital controls,” he says. “The baht is still strong. Under normal circumstances, she would have been fired.”
Asked if she considers that she might be fired with a change in government in December, Tarisa says: “I don’t think so at all.”
The central bank, under Tarisa’s tenure, has also been under attack for its delay in cutting interest rates to bolster economic growth amid the political uncertainty. Interest rates have been cut three times this year from 5% to 4%. Tarisa says monetary policy is not the “silver bullet” in dealing with a slowing economy. She argues that the bank’s hands were tied in cutting interest rates until this year because the headline inflation rate had been hitting 6% in the first half of 2006. She attributes Thailand’s lower GDP growth to a combination of last year’s high oil price, which was felt more by Thais as the Thaksin government had cut fuel subsidies, and the political upheaval. “I don’t think any central bank in its right mind would cut policy rates in those conditions,” she says.
Mixed messages
The military-backed government has also flip-flopped on capital investment plans, with cabinet releasing different statements on its projects and allocated spending. Capital investment would be another tool to help Thailand’s economy through job creation. The government has also created mass confusion with the announcement that it will revise the country’s Foreign Business Act (FBA). The FBA revision will change the definition of a foreign company in Thailand, and it is likely to affect tens of thousands of firms and force divestiture. Foreign businesses in Thailand have argued the changes to the FBA would send the country in the opposite direction to its regional neighbours, which are offering foreign investors clear, attractive ownership structures and tax incentives. The uncertainty created by the proposed FBA changes contradicts statements made in January this year by Surayud who said: “We know businesses welcome predictability.”
Thailand’s continuing political uncertainty has already slashed foreign direct investment. Last year, foreign direct investment (FDI) in Thailand dropped 40% to 307 billion baht ($9.5 billion). Kasikorn Research Centre has forecast that at best this year FDI could tally $5.86 billion and at worst $3 billion. A series of bomb blasts in Bangkok this year, which have killed three people, have also caused foreign firms to reassess plans to invest in Thailand. Vietnam and Malaysia are increasingly attractive as alternative investment destinations for foreign investors.
There has been mounting pressure from the public and the coup makers for Surayud to quit. He has also had to endure widespread reports of a rift between himself and the coup leader, general Sonthi Boonyaratkalin. Sonthi was once a subordinate of Surayud’s, which may explain why he allowed Surayud to overrule his bid to reimpose martial law in Bangkok in April. This would have enabled the military to quash the growing street protests. Sonthi is army chief and chairman of the Council for National Security (CNS), a governing body which comprises the military generals who were behind the coup. The CNS has the power to remove Surayud.
After the elections
Surayud has tried to placate protests by announcing democratic elections will be held on either December 16 or December 23. But there are some who doubt the military will return to their barracks after December, which raises the risk of further instability for the country’s political and economic outlook. Thitinan says the military will only step down when they have ensured that “they will not be prosecuted for what they have done”. Phatra Securities’ Supavud is also not so sure that the military will want to fade into the background. “It would be too naive to expect the military to return to their barracks after the elections,” he says. “We expect the military to remain visible and influential in Thai politics over the next 4-5 years.” If this bears true, it would be widely unpopular. Already, some of the coup leaders have been accused of giving contracts to family members, appointing military officials to state-owned company boards, and taking questionable and costly tax-payer funded trips overseas. They have been accused of graft and nepotism, which are charges similar to those used by the military to justify ousting Thaksin.
Thailand’s elections are eight months away, and much could happen in that time to derail the return to democracy. The only certainty is that Thailand’s economy will remain weak, and that the political crisis will continue, with the military taking centre stage.